I have talked extensively about
“social proof” in fund raising in the past. But the
problem is that most deals – even really promising ones – fail.
Just ask the people who poured money into once “hot”
companies like RazorGator or Friendster.

And we all know that Ron Conway is considered the savviest of
angel investors and yet by definition not all of his investments
succeed.

So being buddies with “all the right people” clearly isn’t enough
to be successful. AngelList – as great and innovative as it
is – does not guarantee success for investors. Obviously.
In fact, sometimes seeing social proof (e.g. lots of brand
names piling on) can lead to group think and price creep. I
personally try to avoid many of these club deals. I like to
invest where I have a personally strong connection with the
entrepreneur and/or a strong intuition on the market from prior
experience. I like to be early – usually first or near
enough to it.

Basically, I’m talking about being an angel leader and not
follower. Lead investors and follow investors can both win
equally but in each case you know why you personally are writing
the check. I have been at cocktail parties where I have
heard prolific angels upon hearing that a buddy was backing a
deal say, “count me in for 25″ even without knowing the details
of the deal. I think that’s sloppy.

It requires domain knowledge to know what you’re talking about
and success long term as an angel. We are all thrown some
good cards from time-to-time. That’s called luck.
Consistently winning like Keith Rabois takes skill.

2. Domain knowledge – Unfortunately many
individuals overrate their own abilities in the “domain
knowledge” area. They have very a very good sense for what
is going on a market but not a well-honed knowledge of an
industry and what will define success or failure.

I see this all of the time in financial services. So many deals
seem like obvious money makers. But then I talk with my partner
Brian
McLoughlin who has worked in the field for 20 years and he’ll
run through the 10 reasons why similar companies haven’t
succeeded. Not in a cynical way – he just has the domain
knowledge to know what has been tried before. It’s sort of like
having an Encyclopedic history book before just launching your
product and seeing whether anybody uses it.

Just because you use all of the products, read all the tech
journals, back-channel at all of the right cocktail parties and
know a couple of guys at Twitter or Facebook does not mean that
you necessarily have well refined domain knowledge.

Remember that you’ll be investing against people who have worked
on the Google algorithm and REALLY know what drives SEO. MySpace
may not have been as successful as Facebook in the end but the
executives there learned how to deal with user growth at
scale. They have real stories about what drives user
engagement and viral adoption.

Here’s the thing – as Michael Lewis talks about in his book, the
adage of investing is that “if you’re reading about something in
the papers it’s already too late.”

Think you know a thing or two about location-based services?
You’re going up against Dennis Crowley who built Dodgeball before
ever founding FourSquare. Oh, and he was acquired by and
worked at Google. Connections. Domain knowledge.

Who ultimately invested in FourSquare? Fred Wilson who had
learned much as an early investor in Twitter. And before
that Bryce Roberts who working alongside Tim O’Reilly (famed
publisher and originator of Web 2.0 Expo) gets advanced access to
and domain knowledge of the who’s who of the tech world.

Want to do a Q&A website? The founders of Quora were
respected technologists at Facebook and
knew a thing or two about bacon and toast before setting up
their highly sought after venture. And when they wanted
money they turned to none other than Matt Cohler, ex VP of
Product Management at Facebook. Access to Deal Flow. Domain
Knowledge.

I know you have good knowledge of how the Internet is developing
and have good intuition of what drives viral adoption, what local
services are needed, what API’s need to be developed, etc.
But before you get out your check book at least have a gut check
on whether your instincts are likely as refined as the other
players sitting at the table. It’s not good enough to win
at the weekend warrior table – you need to win at the WSOP table.

The most interesting thing I’ve learned by being an investor and
sitting on boards & seeing so many company pitches is how
different reality of what is going on at companies is from what
you’re reading about them in the press. So it’s not good
enough to only mine Techmeme every day.

In the Tony Hsieh analogy – it’s the difference between a weekend
player and a professional. In the former you place a couple
of casual bets knowing you may lose. Some early wins can be
deceiving and give you a sense of invulnerability. The same
happens in poker before you lose big. Professionals play
day-in, day-out for years at a time. They spot the tells. They
count the cards. They control outcomes.

Yet the truth is that I see angels with great deal flow &
great instincts whom I believe will only perform well in times
that favor angel investors (like 2010) where there are early
exits. I don’t believe these times will last. And the best
investors over the long-haul will need three more skills.

Part three will be published shortly.

Disclosure: Jeff Bezos is an investor in Business Insider through his
personal investment company Bezos Expeditions.